While sifting through case law this week in preparation for my blog, I stumbled across a great case discussing total loss from the Land of 10,000 Lakes. As we have seen several times before, Minnesota’s total loss roots are based in fire losses.
In 1901, the Supreme Court of Minnesota faced a dispute over a fire loss at a cold storage facility. Not surprisingly given the topic of this post, the principal question in the case was: “What is the meaning of the term ‘total loss,’ as used in the standard policy?”1
Because this was the first time the Supreme Court of Minnesota looked at the issue, it reviewed numerous cases from other jurisdictions. After this thorough review, the Court pointed out,
From a perusal of the principal insurance cases in this country, we think it is evident that the words ‘identity and specific character’ have been used to define total loss only in cases where, according to the facts under consideration, there was substantially a total destruction of the thing insured. There never has been any successful attempt to define what is meant by these words, except in reference to the specific facts in each case. In one sense the specific character of a building is destroyed when the roof is removed, or the interior burned out, and the balance of the structure is left intact; the damage being comparatively slight. The identity of a building is not destroyed if, from the ruins, the original is recognizable; and yet the damage may be complete, and the loss total. While true that the subject of insurance is the building, and not the materials composing it, when does a building cease to be such, within the meaning of the policy? The object of the contract is to indemnify the insured, and not permit him to speculate at the expense of the insurer; to compel the insurer to pay that indemnity in money or to restore the structure, and not permit speculation at the expense of the insured. If, then, as a reasonably prudent business proposition, the remaining portions of the building could be utilized, in place, for the purposes of reconstruction or repairing, the insurer must be permitted to exercise its option to either reconstruct, or pay the reasonable cost thereof, as found by the board of arbitrators. If, however, no part of the building remains which can be utilized, then the destruction is complete, and the loss total, and there is no call for arbitration. Where the line is to be drawn between these two conditions is, in each particular case, a question of fact.
Taking the above into account, the Court reasoned,
It adds nothing to say that total loss occurs when the identity and specific character of the structure is destroyed. We receive no aid from the suggestion that total loss ensues when the reconstructed building would be recognized as a new, rather than the old, structure. No light is thrown on the situation by the declaration that total loss follows from the fact that the remnants constitute a mass of ruins, for amidst the ruins may remain a substantial part of the building. The question, being one of fact, must be determined by the same test applicable to other cases where it is necessary to adopt a standard of human conduct, and that is, what would a prudent person do under such circumstances?
The Court provided further explanation:
[I]t is proper to consider not only the condition of the walls standing, whether they are suitable, in place, to be used as a part of the reconstruction, but also the relative value of such walls, in place, as compared with the cost of rebuilding. It does not follow that, because some part of the remnants may be utilized, in place, there is not substantial and total destruction and loss. The law will not take note of trifles in this respect. It follows that there must remain a substantial part of the building in place, which, with reasonable repairs, can be used in its reconstruction. What such substantial part is is a question of fact depending upon the nature and cost of the structure and the character and condition of the remaining parts. . . .
As such, we have the “prudent person” test. The court will look to see what is reasonable under the circumstances, taking into consideration, among other things, cost to rebuild versus cost to repair using the still standing portion of the building and how substantial the portion is that still remains.
Stay tuned next week for another look at total loss!
1 Northwestern Mut. Life Ins. Co. v. Rochester German Ins. Co., 85 Minn. 48, 88 N. W. 265 (Minn. 1901).